2-23-06
(Today's blog is part of an article about debt that will be included in the new web site I about building on personal finance. If you would like to check out the site, please click here.)
Every person needs to borrow money occasionally. It could be for a home, auto, furniture, recreational vehicle or whatever.
Borrowing money also applies to using a credit card to go out to lunch and pay for it with plastic.
So as you can see, there are many different things to borrow money on. The first thing I would like to point out in borrowing is the difference between good debt and bad debt.
Good debt (yes, it does exist) is borrowing money that will hopefully bring money back to you. This is in the form of investing either in a business or real estate that will either be sold for a profit or used for rental purposes.
Any debt that does not bring money back to you is bad debt. The simple reason is because this simply takes money out of your pocket or checking account. You usually receive something for this debt, but unless that asset can eventually be used to bring money back to you, it is bad debt.
Some kinds of bad debt have to be acceptable. This includes borrowing for a home and transportation.
Most people can’t get away from incurring debt to buy a home or a car. One key is not buying something that is too much. If you have analyzed your finances and situation and believe a $50,000 home or $10,000 auto will meet your needs, then go that route.
Where many people get in trouble is going beyond their needs and relying on wants instead. If this is the case, you will buy more home or auto than you need and the payments will probably run more than you need.
Your money will be tied up on making payments instead of reducing other debt or limit the amount of money you can invest.
Educate yourself as much as possible on debt along with other areas of personal finance. The deeper you go, the more it should scare you about the dangers.
There is a good reason the Bible says a borrower is servant to a lender. You might not feel this way until you start having financial trouble (which I hope never happens to you), but if it does, it’s like the whole world is coming down on your shoulders.
It might sound strange coming from a person in my position as a lender at a bank, but I have seen the dangers of debt. Some of that comes from wanting to keep up with the Jones, but a lot of it stems from a lack of education.
I have seen good friends, relatives and people I have known all my life lose pretty much everything they have from getting in way over their head.
Almost every day, I come across a customer who is overloaded. These aren’t just the 30-50 year olds. This includes young people just getting started and the older people past retirement age.
For the younger ones, this includes student loans, credit card debt and buying that new and expensive vehicle once they are out on their own.
The older ones seem to get worse every day. Faced with limited social security and skyrocketing medicine bills, they have to turn to credit cards to pay for their prescriptions.
I remember one older man who came in to see me recently. He is 67-years old, draws around $800 a month in social security, doesn’t own anything other than household goods and an old jalopy that is constantly breaking down and is worth less than $1,000.
He came in wanting to pay off his credit card debt. I proceeded to do an application. As you can see, his assets weren’t much. I was expecting a loan request of $1,000 or so.
I proceeded to pull his credit and saw where he owed $65,000 in credit card debt and that is what he wanted to borrow. No collateral, just on his name. His monthly minimum payments were far more than his monthly check.
Sadly, we couldn’t do this. Who is to blame? Was it the older gentleman? Partially, but the credit card companies should have never extended this much credit.
The use of credit cards has gotten terrible over the last few years. We frequently see people with good jobs and income with credit card debt in excess of $50,000.
Every person needs to borrow money occasionally. It could be for a home, auto, furniture, recreational vehicle or whatever.
Borrowing money also applies to using a credit card to go out to lunch and pay for it with plastic.
So as you can see, there are many different things to borrow money on. The first thing I would like to point out in borrowing is the difference between good debt and bad debt.
Good debt (yes, it does exist) is borrowing money that will hopefully bring money back to you. This is in the form of investing either in a business or real estate that will either be sold for a profit or used for rental purposes.
Any debt that does not bring money back to you is bad debt. The simple reason is because this simply takes money out of your pocket or checking account. You usually receive something for this debt, but unless that asset can eventually be used to bring money back to you, it is bad debt.
Some kinds of bad debt have to be acceptable. This includes borrowing for a home and transportation.
Most people can’t get away from incurring debt to buy a home or a car. One key is not buying something that is too much. If you have analyzed your finances and situation and believe a $50,000 home or $10,000 auto will meet your needs, then go that route.
Where many people get in trouble is going beyond their needs and relying on wants instead. If this is the case, you will buy more home or auto than you need and the payments will probably run more than you need.
Your money will be tied up on making payments instead of reducing other debt or limit the amount of money you can invest.
Educate yourself as much as possible on debt along with other areas of personal finance. The deeper you go, the more it should scare you about the dangers.
There is a good reason the Bible says a borrower is servant to a lender. You might not feel this way until you start having financial trouble (which I hope never happens to you), but if it does, it’s like the whole world is coming down on your shoulders.
It might sound strange coming from a person in my position as a lender at a bank, but I have seen the dangers of debt. Some of that comes from wanting to keep up with the Jones, but a lot of it stems from a lack of education.
I have seen good friends, relatives and people I have known all my life lose pretty much everything they have from getting in way over their head.
Almost every day, I come across a customer who is overloaded. These aren’t just the 30-50 year olds. This includes young people just getting started and the older people past retirement age.
For the younger ones, this includes student loans, credit card debt and buying that new and expensive vehicle once they are out on their own.
The older ones seem to get worse every day. Faced with limited social security and skyrocketing medicine bills, they have to turn to credit cards to pay for their prescriptions.
I remember one older man who came in to see me recently. He is 67-years old, draws around $800 a month in social security, doesn’t own anything other than household goods and an old jalopy that is constantly breaking down and is worth less than $1,000.
He came in wanting to pay off his credit card debt. I proceeded to do an application. As you can see, his assets weren’t much. I was expecting a loan request of $1,000 or so.
I proceeded to pull his credit and saw where he owed $65,000 in credit card debt and that is what he wanted to borrow. No collateral, just on his name. His monthly minimum payments were far more than his monthly check.
Sadly, we couldn’t do this. Who is to blame? Was it the older gentleman? Partially, but the credit card companies should have never extended this much credit.
The use of credit cards has gotten terrible over the last few years. We frequently see people with good jobs and income with credit card debt in excess of $50,000.
posted by Craig Hall | 4:06 AM
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